It is no surprise that President Obama should be keenly aware of income inequality: He has to look no farther than his own neighborhood to find the most extreme case of it, according to a new study by MoneyRates.com.
The study finds that Washington, D.C. has a greater degree of income inequality than any of the 50 states, and that the states that voted for Obama in 2012 suffer more from income inequality than those that voted for Mitt Romney. However, the study's findings also raise questions about whether a higher level of income inequality is actually a bad thing.
The gap between rich and poor
MoneyRates.com looked at income inequality in all 50 states, plus the District of Columbia, by using the most recent annual wage data from the Bureau of Labor Statistics, as well as data from the previous 10 years in order to measure changes.
Rather than examining outliers -- such as the salaries for the very richest or very poorest workers -- MoneyRates.com focused its measures on income inequality on a comparison between wages at the top 25th percentile and wages at the bottom 25th percentile. The intent here was to capture a gap that's affecting a broad range of workers.
The central figure computed was the ratio between top 25th and bottom 25th percentile wages. The change in this ratio over the 10-year period of the study shows where the gap between rich and poor is widening the most, and where it is narrowing (which is rare).
These figures were then used to look at how income inequality looks in states that voted for Obama in 2012 (blue states) and those that voted for Romney (red states). Finally, the degree of income inequality was compared to median wages and wage growth overall, to see whether the average worker is better or worse off in states with a high degree of income inequality.
Where income inequality is greatest
The ratio between the top 25th percentile and bottom 25th percentile incomes is greatest in Washington, D.C., where high incomes are 2.6 times low incomes. To put some actual numbers on that, high-income workers in D.C. earn $102,980 per year, while low-income workers earn $36,690. The gap is narrowest in South Dakota, where high incomes are 1.89 times low incomes. There, high-income workers earn $41,580, compared to $21,580 for low-income workers.
Want to earn more income from interest? Review MoneyRates.com's listings of high-yield savings accounts.
You may notice that both numbers are considerably higher in Washington, D.C., and this holds true even when they are adjusted for inflation. That raises the question of whether income inequality is actually such a bad thing for most workers, but there's more on that below.
For now, here is a list of the states (plus Washington, D.C.) with the greatest income inequality:
State or District
High income/low income
1. Washington, D.C.
3. New York
4. New Jersey
At the other end of the scale, here is a list of states where incomes are the most equal:
State or District
High income/low income
1. South Dakota
6. North Dakota
8. New Hampshire
9. South Carolina
There is no doubt that income inequality is growing in the U.S. In the 50 states plus the District of Columbia, income inequality increased by an average of 6.43 percent over the past 10 years. The gap widened the most in Maryland, where it grew by 12.05 percent. Only two states saw the gap actually narrow, led by Wyoming where it narrowed by 3.11 percent.
Check the map below for a state-by-state breakdown of inequality ratios (high income/low income) and their rate of change over the past 10 years.
Red state vs. blue state
Income inequality is one of many issues on which Republicans and Democrats disagree. Philosophical differences aside, one reason why the two parties may see this issue from different sides is that their voters experience income inequality to different degrees. Income inequality is worse in blue states, and has also grown more quickly in those areas over the past 10 years.
In blue states, the average ratio between high and low incomes is 2.27, compared to 2.18 in red states. What is more striking is the difference in how rapidly the income gap has grown over the last 10 years. In blue states, the ratio between high and low incomes has grown by 7.74 percent, compared to 4.96 percent in red states.
This is not to say that Democratic policies worsen income inequality while Republican ones level the playing field. After all, not all states that voted for Obama necessarily have Democratic leadership, and in some cases the party in power has changed hands over the past decade.
What the figures do help explain is why Democrats may be more sensitive to this issue than Republicans, since people in states who supported Obama are experiencing more income inequality than people in other states.
Is income inequality actually good for most people?
The expression "income inequality" implies some form of injustice, but differences in income are a natural condition of a capitalist society. After all, some people work harder than others, and some add more value to their employers than others. Some argue that the incentives created by income inequality make the economy more dynamic, and there is some support for that argument in the study's numbers.
Median incomes, adjusted for the differing costs of living in different states, tend to be higher in states with the biggest gaps between high and low incomes. So, while upper-income people may be benefiting the most in those states, the average worker is also better off in those states than in places with smaller income gaps.
On the other hand, looking at changes over the past 10 years suggests this advantage may be fading. Median incomes have grown more slowly in states where the income gap has been increasing most quickly.
Ultimately, what these figures seem to suggest is that a reasonable degree of income inequality is actually good for a state's prosperity, but that if income inequality rises too quickly, it starts to leave the average worker behind.